Future retail growth and profitability depend on sustainable supply chains
Sustainable supply chains are more than a buzzword (or simply public relations greenwashing).
If you’re paying close attention to the industry, you’ll realize that sustainability in supply chains is not just advisable, it is the key to survival (and profitability) for today’s retailers and CPGs.
But achieving sustainable supply chains is easier said than done.
Most of today’s retail and CPG supply chains were built to exploit the fruits of globalization — not ensure sustainability. For example, global supply chains have long been:
- Overproducing goods in foreign factories with lax labour laws
- Monopolizing finite raw materials in Third World countries
- Relying on trade agreements to keep international shipping cheap
- Using just-in-time inventory practices, taking the resilience of supply chains for granted
But as the global economy changes in the 2020s and beyond, these outdated practices are becoming a major liability.
This has become abundantly clear over the last few years, with major shortages impacting nearly everything from lumber, bamboo, and tapioca, to refrigerators, vehicles, and video game consoles.
The globalization gravy train has stopped. Next destination: sustainability.
To better understand why sustainable supply chains are so important, let’s take a quick look at how the retail and CPG industries have shifted in the past 2 decades.
What is supply chain sustainability?
Simply put, a sustainable supply chain is one that can ensure all stages of the supply chain journey (from harvesting raw materials and manufacturing to last-mile delivery of finished goods to consumers) are designed to account for human rights and fair labour practices, to minimize the negative environmental impact, to minimize material waste, and ultimately, to ensure future generations can continue reaping the benefits of economic and social growth.
Short history of supply chain sustainability
Throughout the late 20th Century, retailers and CPG companies were focused on resource productivity, meaning that globalization was the key to their success. Retailers and their suppliers boosted sales and profits thanks to a dramatic shift in manufacturing and trade.
This was possible because:
- Talented labour in other countries was cheaper than domestic workers
- Overseas factories began producing high-quality products at lower prices
- Consumers wanted goods to be equally attainable for all financial classes
- Increased margins allowed retailers to stock more inventory and carry larger assortments
Unfortunately, the retail and CPG practices of the 20th century resulted in many changes (some detrimental) to the environmental, economic, social, and even political spheres.
Today’s retail and CPG companies are faced with a number of demanding new factors:
- Consumers, trade organizations, and governments are beginning to value ethical operations over cheap production
- Third World countries have quickly industrialized and built local economies, increasing the cost of labour and raw materials
- As a result, overseas production prices have been rising exponentially
- The world is feeling the impact of supply chains on climate change, and organizations are feeling the pushback
Despite these challenges, consumer demand for goods continues to grow.
This is why retail giants like Amazon continue to grow, simply by virtue of improving and optimizing their supply chains. Simply put, they have the things you want when you want them, close enough to your location to guarantee you’ll get them tomorrow.
This isn’t possible by simply overstocking the 12 million SKUs Amazon offers for sale. If they overstocked every SKU at every distribution center, they would simply go out of business. This sort of optimization is only achievable through technology like predictive analytics to accurately forecast demand for every geography, AI to automate large-scale operations like replenishment for 12 million SKUs and robotics to automate and streamline processes.
In short, true supply chain sustainability that minimizes waste while increasing profits can only be possible through the effective use of technology. More on that later.
Let’s take a closer look at how sustainable supply chain management results in efficient, cost-saving operations that are better suited to our current social, and environmental needs.
Sustainable supply chains are key to success in retail and CPG
Sustainability is not something the retail industry can ignore. Sustainability issues can disrupt a retailer’s business.
A study of Toronto’s climate change impacts, by the International Journal of Environmental Research and Public Health, predicts that more intense ice storms, heatwaves, and urban flooding could disrupt the power lines and roadways, compromising future supply chain operations.
To put this in perspective, retail-related supply chains cause nearly 40% of global greenhouse gas emissions worldwide. The impact of retail businesses cutting unnecessary production and transportation would be game-changing (for their bottom line and the environment).
In addition to saving costs by streamlining operations, retailers will also gain the support and loyalty of today’s ‘sustainable shopper’.
The challenge, of course, is that even though sustainability is essential, retailers are still businesses that must generate profits.
Is it possible to prioritize both?
Why is building sustainable supply chains important?
Obviously, sustainable retailers are not working against their own interests. In fact, they are actually benefiting on many fronts, including increased GMROI, improved brand image, and more market share.
Let’s take a closer look at the top four reasons why building a sustainable supply chain is important for retailers (and the world).
1. Building a sustainable supply chain might just save the world
With 40% of all greenhouse gas emissions coming from the supply chain sector, any improvement to the world’s supply chains would be a boon to the planet and future generations. In a perfect world, this would be reason enough for retailers to rethink legacy supply chain practices.
But since we don’t live in a perfect world, here are 3 more reasons.
2. Unsustainable supply chain practices are becoming incredibly expensive
Today’s retailers are bleeding cash at every stage of the product journey because of inefficiencies that are intrinsic to their outdated business practices.
- Planning inventory at the category level isn’t precise enough to prevent wastage on individual SKUs, leading to metric tons of goods being destroyed every year
- Allocating inventory across B&M locations or DCs without accounting for their unique demographics or demand profiles will inevitably lead to massive inventory distortions, out-of-stock, and over-stock — wasting raw materials, freight, warehousing space, etc.
- Replenishing inventory using rudimentary methods like re-order point, top-off, or periodic replenishment leads to a lot of waste, not only in terms of out-of-stock and overstocks, but also unnecessary shipping costs (and C02 emissions)
- Failure to proactively rebalance inventory across locations leads to dead stock in some locations, with new inventory of that same SKU being ordered at full cost for other locations — creating unnecessary replenishment costs and supply chain emissions
If losing money on easily solvable issues is not enough, retailers are struggling to hold on to market share as consumers choose a value-driven shopping experience.
Making supply chains more efficient will not only stop the bleeding, but it may also save the planet.
3. Unsustainable companies are becoming social pariahs
21st-century consumers want a purpose-driven shopping experience, and they are voting with their wallets.
Making sustainable practices in supply chain strategies more visible to the public generates goodwill and customer loyalty.
Retailers and CPG companies that don’t step up will get left behind by their own customers.
The National Retail Federation found that 77% of consumers want sustainable brands and most are willing to change their shopping behaviours to get them.
The catch is, that consumers struggle to get good sustainability information. That’s why they use brands as proxies for the sustainability issues they care about. Consequently, retailers and CPG organizations need to be careful when playing the sustainability card and must have proof of their claims because consumers don’t like being lied to.
In a world where social media instantly amplifies these stories, the last thing your company wants is to get called out for greenwashing.
4. Shareholders are prioritizing Environmental, Social, and Governance (ESG) criteria
Over the last decade, consumer outrage has grown deafening over sustainability concerns like:
- Unethical supply chain practices
- The volume of carbon emissions
- Massive destruction of overstock
- Impact on local environment and economy
This has had massive implications for how investors and shareholders evaluate companies today. Beyond a renewed sense of social responsibility, investors are beginning to equate sustainability with innovation and future success.
In response, retail and supply chain leaders are investing in analytics and AI-powered retail IT because it enables them to optimize operations — from planning all the way to fulfillment.
This has caused retailers and supply chain leaders to face a “make or break” decision: invest in more sustainable practices in supply chain management or get left behind.
Common challenges and conflicts in sustainable supply chain management
If having a green supply chain is so vital to the future success of retail, why aren’t more retailers making the change?
To develop an understanding of why many retailers are hesitant to make the change, we need to look at some sustainability issues in supply chain management.
3 sustainability issues in supply chain management:
1. Perceived high costs
The most common myth about building sustainable supply chains is that the transition will be too expensive.
If you take a very narrow slice of the full picture, the concern might even appear to be true.
- Fair labour practices are more expensive than sweatshops
- Responsible sourcing of palm oil is better for deforestation but much more expensive on purchase orders
Both examples would lead to a more sustainable supply chain but are inarguably more expensive in the short term.
But this is the wrong way to think about sustainability.
The big-picture reality is that inefficient supply chains are actually costing retailers billions today, and perhaps trillions in the future:
- Markdowns on excess inventory cost US retailers $300 billion.
- Lost sales due to empty shelves cost another $145 billion.
- Add another $428 billion to the tally to cover the cost of returns.
And this doesn’t even account for costly environmental crises, quickly diminishing supplies of raw materials, and social and political unrest in exploited communities — all of which are hidden from the plain sight of a company balance sheet.
In short, it is not only more expensive to do nothing, it will only get worse.
2. Supply chain visibility
Global supply chains are complex.
A retail product may carry a single brand’s logo, but it takes a giant web of subcontractors, suppliers, brokers, and logistics vendors to get it on the shelf.
Establishing what happens within that web is where complexities and challenges arise.
Due to the fact that retail supply chains consist of so many players, channels, and products, having a clear picture of the supply chain and how it affects the overall business is out of reach for most. Without clear visibility, retailers are unable to see areas;
- Where they can increase cost savings
- Where they can influence sustainability efforts
Essentially, limited supply chain visibility means limited supply chain control — often resulting in wasted expense and inefficient, less sustainable supply chains.
Thankfully, there is a solution.
Advanced analytics technology unifies the business across all channels, gaining greater visibility and resulting in more thorough management of retail supply chains.
3. Communication and responsibility
It’s essential that all players involved in a supply chain be on the same page.
Limited visibility creates a litany of supply chain issues. But when that lack of visibility is coupled with poor communication — the results can be costly and even result in store closures and bankruptcy.
Naturally, bad things happen when promotion planners and inventory planners don’t talk. Things get worse when the retailer and its vendors, distributors, warehouse operators, and freight companies talk past each other.
The resulting drama and finger-pointing hide an essential fact: visibility matters. Outside stakeholders have their own agendas and may not share your business values. Visibility lets you define clear, measurable performance standards. Use those shared standards to set expectations and hold people accountable.
After that, it’s a matter of time and relationships. Sloan School of Business professor Joann de Zegher explained in an MIT supply chain report that, “often, reducing harm in the supply chain is complex, and it therefore requires time and long-term engagements between buyers and suppliers.”
What does sustainability in supply chain management look like?
Sustainability in supply chain management requires each piece of the supply chain to collaborate and work in tandem with one another. And it requires all players to align on longer-term goals — not just cutting costs on the very next PO.
This requires all players and stakeholders to align on:
- Investment of time and money
- Next steps
With the right tools, a retail organization can measure the right data, make the data visible to all stakeholders, and enforce responsibilities across the supply chain.
The role of operations management in sustainability and supply chain efficiency
Given how big the problem of sustainability in supply chains is, it’s easy to pass the buck to someone else — consumers, logistics vendors, or even suppliers. How are you supposed to tackle such big issues for your organization — let alone the world? Sounds like a problem for top-down, governmental action.
But that’s the wrong way to think about it.
The biggest measurable impact we can make on supply chain sustainability starts with the operations management of individual organizations.
- While consumers may still unwittingly prop up unsustainable practices with their wallets, this is changing quickly
- While it may be difficult to change the behaviour of your logistics providers (or force them to upgrade their fleets) — you can optimize your POs and order frequency to minimize unnecessary emissions (while saving exorbitant amounts on shipping)
- While your merchandisers may insist on new, short-lived designs every season — you can more accurately predict sell-through and minimize material waste, overstocks, and shipping-related emissions of moving thousands of new SKUs through the supply chain every few months
And this is just barely scratching the surface.
The point is this: every organization partaking in the supply chain, including individual retailers and CPGs, has not only the ability but the imperative to optimize their operations with sustainability (and future profitability) in mind. And this starts with better data, analytics, and forecasting.
Relying on trends or gut calls never works for long due to the speed at which changes happen within the industry.
If operations management professionals start using artificial intelligence and advanced analytics to optimize their corner of the supply chain, they’ll be able to achieve:
- Fewer replenishment orders
- Less inventory rebalancing
- More efficient returns
Each one of these crucial operations, if left unoptimized, can generate unnecessary vehicle travel, exorbitant C02 emissions, and massive costs. But when optimized, retailers can greatly reduce the number of carbon emissions and help create a more sustainable supply chain and retail business (while improving their bottom line).
Using technology to create supply chain visibility
Advanced analytics platforms provide panoramic visibility to retailers and CPGs, allowing them to be more proactive and responsive to supply chain issues.
Done well, advanced analytics can help organizations predict and prevent supply issues, account for risks and variability, safeguard their revenue, and identify inefficiencies that drain resources.
One major example where leading retailers are currently using advanced analytics is to prevent the overproduction of goods.
Let’s say Bob wants to introduce a new backpack into his back-to-school assortment. His seemingly simple decision of how many units to order is complicated by a slew of factors:
Because Bob is not using advanced analytics, he isn’t equipped to answer any of those questions. Instead, he orders way more units of the backpack to create a safety buffer and minimize lost sales. After all, he doesn’t want to leave revenue on the table.
Unfortunately, Bob overshot and ordered significantly more inventory than was in demand. Bob’s Emporium spent time and money on manufacturing, transport, and storage of goods that would never be sold. They’ve wasted resources and damaged the environment for a product that will either be destroyed or sold at a loss.
Bob would have avoided this mess if he’d invested in a predictive analytics solution to help him answer his questions.
Using software like Retalon, retailers and CPGs are able to uncover true demand for every SKU, at every location, at every time. By unifying all retail channels under one solution, retailers gain an understanding of the interconnected influence of each location, warehouse, transport route, and so on. This allows them to:
- Minimize POs, logistics costs, and carbon emissions
- Minimize material and inventory wastage
- Minimize unnecessary markdowns
- Increase sales by ensuring a higher in-stock percentage
Optimize supply chain operations and sustainability will follow
Ultimately, supply chain efficiency and sustainability are two sides of the same coin.
Retailers must first focus on optimizing the supply chain and sustainability will soon follow.
Using modern technology like advanced analytics, artificial intelligence, machine learning, and automation, you can:
- Cut overstock by only sourcing products that have real demand
- Slash your carbon footprint by eliminating unnecessary shipments and routes
- Gain customer loyalty by championing the most important cause of our times
Going sustainable is not just good for the planet — it’s good for your balance sheet.